How Tech Firms Have Disrupted NYC Office Leasing As We Know it and the New Downtown

June 21st, 2016

In case you live under a rock and haven’t heard, there’s a tech revolution happening in New York. In the past two years, hundreds if not thousands of new tech companies have hatched in NYC. More than a few are experiencing rapid growth and gobbling up space. As west coast marquee names have planted roots in Manhattan, publicly traded companies you may not have heard of out of Austin, Boston, London, and Israel, among other destinations, are opting for space in New York.
There’s a war on talent for engineers and programmers and other folks who make these firms hum. Most of this talent is young… certainly under 40 and often under 30. And money is not the only or even primary concern for this talent pool. They want to do meaningful work to make a difference and feel good.
And they want to be in cool space.

How do they define “cool”? They want loft or converted manufacturing space with big windows, high ceilings, wood or concrete floors and lots of open space. It is no longer about being in class A glass and steel sky scraper and winning the corner office. Those “Mad Men” days are dead. These tech companies, and the 20-somethings that are flocking to them, want to be in Union Square and Hudson Square and the Meat Packing district.

This has created a major disruption to the NYC office market. Prior to this tech craze, finance and law firms took the most space and they liked being in mid-town and the plaza district. Typically, their office installations had lots private offices with dropped ceilings and cubes for assistants and worker bees. Those looking to save money went downtown into similar kinds of buildings.

In the past year, for the first time ever, tech firms absorbed more space than finance. This radical shift in demand has had huge effects on the area real estate people call Mid-Town South. For example, Vicus Partners (us) did a deal about two and a half years ago in a classic Union Square loft for about $30/s.f. with a full work letter and a lot of free rent. In other words, for $30/s.f. the landlord also had a million dollars in tenant concessions to land this client.

Today that deal would be $55-60/s.f. with a significantly less concessions. That’s a 100% increase in less than 3 years.

Those lucky few who own buildings in this area are very happy. The rest of us must face the disrupted natural order of things in NY commercial real estate.

Increased competition for space raised the costs in these hot tech areas, but the proliferation of tech firms landing in NYC has not ebbed. Tech start ups still want and need cheap space. As they have been priced out of the “cool” areas, their alternative of choice has shifted to downtown Manhattan. This is where tenants can still find a $30/s.f. deal.

In the great tradition of: if you build it, they will come, savvy downtown landlords are embracing this new breed of downtown tenant offering “tech installations” in buildings on Wall Street, Broad Street and lower Broadway. Space that might have been “pre-built” with a traditional office intensive installation is now being built with exposed ceilings, concrete floors and lots of open space to attract these tech-centric tenants.

And it’s working. PWC reports in their most recent real estate survey that “leasing activity has been extremely strong Downtown, where new deals totaled 1.7 million s.f. in the first quarter, accounting for five of the top ten new leases in the city and representing the highest first quarter leasing level the downtown market has seen since 2004.”

As basic supply and demand theory suggests, if there’s an increased demand for space downtown and a fixed amount of product, it follows suit that prices will go up. We’ve been seeing it slowly happen for the past six months and believe that downtown will get a lot more expensive in the coming year. Our prediction is that rents could rise as much as 20% in the next year, particularly in the lower priced space that is in such hot demand.

If you are a long term downtown tenant and you can renew your lease, do it. Like low mortgage rates, your opportunity to lock in cheap rents will end soon. If you have between 1-3 years of term left on your lease, you should be focused on renewing early. Call us. We can help.